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JANET NAPOLITANO
Governor
WILLIAM BELL
Director
ARIZONA DEPARTMENT OF ADMINISTRATION
OFFICE OF THE DIRECTOR
100 North Fifteenth Avenue, Suite 401 Phoenix, Arizona 85007 (602) 542-1500
JUN 2 9 2007
June 27,2007 The Honorable Janet Napolitano Governor of the State of Arizona State Capitol 1700 W. Washington Phoenix, AZ 85007 The Honorable James P. Weiers Speaker of the House Arizona House of Representatives 1700 W. Washington Phoenix, AZ 85007 The Honorable Robert Burns Chairman, Senate Appropriations Committee Arizona State Senate 1700 W. Washington Phoenix, AZ 85007
OFFICE OF THE PRESIDENT
The Honorable Tim Bee President of the Senate Arizona State Senate 1700 W. Washington Phoenix, AZ 85007 The Honorable Russell K. Pearce Chairman, House Appropriations Committee Arizona House of Representatives 1700 W. Washington Phoenix, AZ 85007 Richard Stavneak, Director Joint Legislative Budget Committee 1716 W. Adams Phoenix, AZ 85007
Dear Governor Napolitano, President Bee, Speaker Weiers, Representative Pearce, Senator Burns and Mr. Stavneak: Please find enclosed the Annual Report on the Financial Status of the Special Employee Health Insurance Trust Fund, as required by A.R.S. 38-654 (H). If you have any questions concerning this report, please contact Paul Shannon, Budget Manager at 542-1510. Sincerely,
Charlotte Hosseini Deputy Director c: James Apperson, OSPB
Actuarial Memorandum Employee Health Insurance Trust Fund Pursuant to ARS. 538-654 March 1,2007
Contents Executive Summary Actuarial Methodology Actuarial Assumptions Data Enrollment HITF' and IBNR Reserve Preliminary Premium Rate Increase Analysis of the HITF for October 1.2004. through September 30. 2005 Analysis of the HITF for October 1. 2005. through September 30. 2006 Analysis of the HITF for the current plan year October 1.2006. through September 30. 2007 Analysis of the HITF for the projected plan year October 1.2007. through September 30. 2008 Analysis of the Actuarial Soundness of the Health Insurance Benefit for PY06 and the Current PY07
................................................................................................................................................................................... 2 .............................................................................................................................................................................. 3 .............................................................................................................................................................................. 4 ............................................................................................................................................................................................................. 5 ............................................................................................................................................................................................. 6 ........................................................................................................................................................................... 7 ....................................................................................................................................................... 9 ...........................................................................................10 11 ........................................................................................... ..................................................... 12 ..................................................13 ........................................14
Executive Summary The purpose of this actuarial memorandum is to demonstrate the development and financial status of Employee Health Insurance Trust Fund (HITF) pursuant to A.R.S. $38-654 (H), which reads: The department of administration shall submit an annual report on the financial status of the special employee insurance trust fund to the governor, the president of the senate, the speaker of the house of representatives, the chairpersons of the house and senate of appropriations committees and the joint legislative budget committee staff by March lSt each year. The report shall include: The actuarial assumptions and a description of the methodology used to set premiums and reserve balance targets for the health insurance benefit program for the current plan year, An analysis of the actuarial soundness of the health insurance benefit program for the previous plan year, An analysis of the actuarial soundness of the health insurance benefit program for the current plan year, based on both year-to-date experience and total expected experience, and A preliminary estimate of the premiums and balance targets for the next plan year, including the actuarial assumptions and a description of the methodology used. Highlights of the actuarial memorandum are as the following: The enrollment growth of the plan is fairly flat at 0.6%, = The projected HITF balance at FYE 07 is $71.1 million, = The preliminary premium composite rate increase for plan year 2008 is 7.3%, and = The plan appears to be actuarially sound for the past plan year 2006 and the current plan year 2007.
Actuarial Methodology The Arizona Department of Administration (ADOA) uses three elements to manage the Health Insurance Trust Fund (HITF), to set premiums, and to estimate the claims incurred but not reported (IBNR) reserves: Experience rating, Risk adjustment factors, and Information systems. ADOA uses what is known as a prospective experience rating method in which premium rates are set in advance based upon a plan's experience and projected future experience. Prospective experience rating takes into account the pooled historical and projected costs of the active and retired members of the health insurance benefit plans managed by the ADOA (collectively, the Plan). The following factors are taken into account when projecting historical cost and utilization to future time periods: Inflation of medical costs, Claims incurred but not reported, Provider contract renewal dates, Delivery system changes, Enrollment and population changes, and Changes in medical technology and other factors that affect medical costs. Risk adjustment factors incorporate the health characteristics of the Plan's patients, as well as their propensity to use clinical services. The following factors may be used: Age and gender demographics descriptors, Clinical data fiom claimslencounters, and Survey data and health risk assessments (HRAs), when available. Information systems support premium rate and fund development activities: a variety of data enable the monitoring and analysis of the Plan's utilization, cost and the overall financial performance. Various vendor reports and detailed medical and pharmaceutical data are available.
3
Actuarial Assumptions
The following assumptions were used to develop the HITF projections: Projections are based on operating cash flows, Annualized trends include utilization and cost components for Plan Year 2008, Annualized medical trend of 12.0%, Annualized pharmaceutical trend of 12.0%, Annualized dental trend of 7.5%, Plan administration fees to increase by 6.0%, Stop-loss reinsurance premiums to increase by 15.0%, $500k quarterly Medicare Part D subsidy reimbursement trended at 12.0%, $1 million quarterly in prescription drug rebates refunded back to the plan, Annualized medical trend in enrollment growth of 0.6%, and Annualized dental trend in enrollment growth of 0.6%. More of the larger agencies will adopt a pay-as-you-go method as opposed to participating in the General Fund Sweep.
Data
The following data were used to develop the HITF projections: Actual monthly paid claim funding requests, Actual monthly paid medical, pharmaceutical and dental data reported by the administrators of the integrated and nonintegrated networks, Current medical plan enrollment, rates, and employee and retiree contributions fiom July 1,2004, through December 3 1, 2006, Administrative fees for each plan fiom July 1,2004, through December 3 1,2006, Dental enrollment, premiums and claims/encounters fiom July 1,2004, through December 3 1,2006, Stop-loss reinsurance premiums and recoveries from July 1,2004, through December 3 1,2006, The HITF ending balance of approximately $94.7 million as of December 3 1,2006, and Costs associated with pass through of Blue Cross Blue Shield's plan for NAU. A schedule of paid and projected medical and dental claims, appropriations and receipts is included in the analysis sections of this memorandum.
Enrollment The following enrollment forecasts were used to develop the HITF projections. The medical enrollment was trended at 0.6% growth annually for PYE 07 and PYE 08. The dental enrollment was trended at 0.6% growth annually for PYE 07 and PYE 08.
Efirallmrrrt Projr caian Actual PYE 114 Actual PIT US Actual PIEE116 Projected PIEEn7 Prajasted PIT ng
Retirees University Total Medical Dental
9,0123 14,996 5593 59,lIJl
9,5183 18,318 83,412 59,977
5l,Q184 18,6501 64471 6lZ686
9,713 14750 64,8164 62,056
9,7221 16,851 85,243
62,429
'5tak Employeas including Political Suhdivisinns md NAU.
PYE = Plan Year End
HITF and IBNR Reserve
The HITF reserve was set up to cover potential fluctuations due to experience not developing as projected and to reimburse ADOA's administrators, vendors and funded plans. The HITF reserve will also cover potential, additional administrative expenses and the Plan's possible losses in subsequent periods. In addition, HITF reserve fundsare available to offset a portion of the liability associated with the IBNR claims run out for the self-funded medical plans. The HITF balance changes as general fund receipts are added and expenses are paid. It is important to note the HITF balance can fluctuate greatly from month-to-month due to revenue fluctuations as well as the effects of the General Fund Sweep. There is an assumption that more agencies will adopt a pay-as-you-go method rather than participating in the General Fund Sweep. As the larger agencies adopt the pay-as-you-go funding, we can expect the HITF balance to be more consistent fiom one month to the next. The PYE 08 HITF balance of $103 million is very sensitive to both claim projections and projections of receipts. However, the change of the HITF balance has been only about 3.0% of the total expenditures for the last three plan years. The IBNR reserves are estimated, based on the monthly pattern of incurred and paid claims, and measure of the time and amount between the month a claim is incurred and the month the claim was paid. The calculation of the IBNR reserve is based upon the claim lag pattern experience through December 31,2006, trended fonvard. The amount to hold for the IBNR reserve was calculated by taking the claim distribution of the claim probabilities. Once the claims distribution was set up the mean and the standard deviations were calculated for the claim distribution. The projected HITF balance can be compared to projected IBNR Reserves.
HITF and IBNR Reserve (Continued)
Numbers iae in millions
AC~!A FYE 05
Actwl
PYE 05
Actual FYE 06
Actual PYE 06
projected FYE 07
Projected PYE M
ProjectedS FYE 08
projected PYE 08
Projected Receipts Projected Expensel
$506.8 $485.0 $45.0
$544.8 $506.2 $46.9
$553.2 $555.9 $47.1
$550.6 $558.1 $46.5
$635.7 $611.6 $56.6
$620.2 $611.6 $56.6
$647.7
$639.3 $59.1
$658.4 $647.1 $59.9
IBNR End& Reserve
Loss Ratio3
FYE = Fiscal Year End
PYE = Plan Year End '~rojectionsare based on operatiug cash flows
aIncluding lCdminfees, Stop-Loss, and DentaL
3 ~ ~ e l mmah Rolling Loss Ratio ve
%du+ %du+
a composite rate increase of 13.3%. a composite rate increase of7.3%.
Preliminary Premium Rate Increase
The following is the build up for the Preliminary 2008 Plan Year rate increase. The composite projected rate increase was developed by pooling the experience and expenses of employees, retirees, and dependents. The projections include all medical, drug, and dental costs. While the projections reflect a combined rate, the actual rate increases of employees and retirees are likely to differ. The effective rate increase may depend on a group's pro-rata share of the claim cost and the future cross-subsidy between the rating tiers and enrollment status. Each medical product has a 2.0% margin built into the premiums; health premiums are set for a 98.0% medical loss ratio. Setting the margin at 2.0% (98.0% loss ratio) would suggest a 7.3% composite rate increase.
Projected Composite Premium Increase Humhers in 1,DDDs Annualized Trend Medical & Drug Claims Arlmifiistration Fees Stop-Loss premium O h r AEtnifiErpenses te Dental Expenses Totat casts TotalRcceipts PY 06 (iiludkg Pslt D refund) Twelve month loss ratio 21 mrmths Trend Factor Prajected PYE 08
Proposed PY 08 Premium Increase
Note that the proposed 7.3% composite increase is less than the annualized cost trend of 11.4% over the 21 months. The difference between the projected cost and the proposed rate increase is largely due to slightly better than expected claims experience, as shown by the 97.2% loss ratio for CYE 06.
Analysis of the EUTF for October 1,2004, through September 30,2005
Receipts and costs include: the self-funded plan's claims/expenses, URUM administration fees, stop-loss premiums, Blue Cross and Blue Shield premiums, and Pacificare premiums. Claims and expenses are based on actual cash flows. Note the HITF balance can fluctuate greatly from month-to-month due to revenue/expense fluctuations as well as the effects of the General Fund Sweep.
Actual
Actual
Actual
Actual
Actual
Mar45
SX2.7332
Awns
$77.0270 49.7Al
I
d
Total
544.SZl.l
4.538
-8 33,1248
Medical& Drug Claims (cashbares) AdmWtfetionFees Stop-Losspremium Othu Adminkrpsnsss
4,06 549
1m5 2320
4,03 276
1.6D43 232.8
P) a
47.1XS5
3,056.4
w . 8
m3
447846
42.1981 im.4 ZP.8 1965 44.215.4
v.6
444.rn1.6 17.X86.6 2,453.7
5243.4
-2
35342.4
-1
49,7681
33,124.0
544822.1
Analysis of the HITF for October 1,2005, through September 30,2006
Receipts and costs include: the self-funded plan's claimslexpenses, URUM administration fees, stop-loss premiums, Blue Cross and Blue Shield premiums, and Pacificare premiums. Claims and expenses are based on actual cash flows. Note the HITF balance can fluctuate greatly from month-to-month due to revenuelexpense fluctuations as well as the effects of the General Fund Sweep.
Actud
A! o c. l u
OcUl5 Ex7334.0 41m.1
Nmr-05 $42513 40.0145
Actnu! DccaS $ZtS>26.1 35,6259
Actual JmM
Actual
Actual
176gl56 52,1912
Feb-06 S8976.P 35947.1
Mar46 $747776 4350.4
Actual Apr-06
$68931.4 5474.1
Actual May-M S844133 35,893Ll
Actual Jun-06
Actud Jul.06
Actual Aug-M
Actual
ScpW
$66.4660 9.418.4
Total
11741865 31,1436
$47.021.4 35.4243
$42.0123 79,5992
5-3
Analysis of the HITF for the current plan year October 1,2006, through September 30,2007
Receipts and costs include: the self-funded plan's claimslexpenses, URUM administration fees, stop-loss premiums, Blue Cross and Blue Shield premiums, and Pacificare premiums. Claims and expenses are based on actual and budged cash flows. Note the HITF balance can fluctuate greatly from month-to-month due to revenuelexpense fluctuations as well as the effects of the General Fund Sweep.
BeginningBalancr EstimatcdMrmthlyMedicaUDentulReceipts Msdicsn PmtD SubsidyPaymmt Medical& Drug C a m (cashbases) lir AdminirCrationFees StDpLorspremium 0 t h AdminExpcnses
Actual Oct-06 $79813.1
Actwl Nov-Cki $87501.4
Actual Dcc-06 B8.1135
Actual 1-m $93241.1
Pmjectud ~eb.07 W.8959
Projected
Mr0 a-7 57 2 8W
Pmjsctad Apfi07 18730311
Pmjechd May47 1101,6593
Pzcjectcd
Judl7
Pmjachd
Jd.07 $71.1155
E Z73 X 69
Pmjected Augm $79P13
Pmjsctod
Sepm
l2.2619
Ttl oa
T w e k monthloss ratio
Analysis of the HITF' for the projected plan year October 1,2007, through September 30,2008
Receipts and costs include: the self-funded plan's clairns/expenses, URUM administration fees, stop-loss premiums, Blue Cross and Blue Shield premiums, and Pacificare premiums. Claims and expenses are based on budged cash flows. Note the HITF balance can fluctuate greatly from month-to-month due to revenuelexpense fluctuations as well as the effects of the General Fund Sweep. There is an assumption that more agencies will adopt a pay-as-you method rather than to participating in the General Fund Sweep.
PY200X cashF ~ ~ K P I ~ ~ c ~ ~ Numbersm lp00s
BegmnmgBalaaee Estnnuled Monthly MadtcallDmtdRecuptr Modtcan PadD Subndy Payment Medical& Drug Clahns (cash bares) Ad&istratinnFeer StDpLDss prembna
Pmjscted
Oct-07
Pmjscted NOY-UI
Projected Dee-07
P~ojccted
Jnn-Og
Projected FebOs
$94,2436
Pqected
Mu-(lg
$%8,W2 5,,97 6@48
$83,7539 53,1423
$87.9707 f2.4438 536 0
$95,7191
%@8J
516442
Ol.6257 54,6367
552.0
Pcqscted Apr-08 W4 50 .6.
Prqected May-MI
Projeclnd Ju&Lx
545549
$3984 9E395 5231*3
5849855
2&?47
Projacted JuU18 $79,531
Projected Aw-08
Projected
Snp.08
TOM
516414
$937 8.76 62.m4
-4
56813
55,2351 58511
656,1545 221 ,43
Mhu AdminErpenrcs
Twehe monthloasratio
Analysis of the Actuarial Soundness of the Health Insurance Benefit for PY06 and the Current PY07
The analysis of the actuarial soundness of the health insurance benefit looked at the following topics: Experience rate setting, Trend (utilization and cost) of the Plan's claims/encounters by network, Administrative expenses, and = Risk adjustment factors. The past and current rates were developed using generally accepted actuarial principles and practices and are considered to be actuarially sound. The rates are developed by pooling the experience and expenses of employees, retirees, and dependents. The projections include all medical, drug, and dentalcosts. The actuary for the plan uses a forecast model to determine cost trends and expenses. Calculations within the model use a twelve month moving average of incurred medical and pharmaceutical claims and encounters. The model also includes IBNR, administrative expenses, and other third parties costs. The model includes an estimate of incurred and paid claims run-out. To insure the adequacy of the premiums for the Plan's benefits the actuary uses several industry standard tools and sources. The Milliman Health Cost Guidelines are used to the model and price the Plan's benefits and expenses. Also, the financial status of the Plan is compared to external research and statistics. Some of the studies used for comparison include the Centers of Medicare and Medicaid Services and the Kaiser family foundation.
Analysis of the Actuarial Soundness of the Health Insurance Benefit for PY06 and the Current PY07 (Continued)
Medical claims and encounters analysis was preformed with incurred dates October 1,2004, through September 30,2006, with four months of run-out, see summary below. The Plan had a 12.5% trend in cost and utilization for the experience period. The 12.5% trend is a function of the 3.2% increase in trend for the integrated network and of the 22.3% increase in the trend for the nonintegrated networks. The Plan's trend is higher than the industry trend of about 8.0%. The fact that the Plan's trend is higher than the industry's can be attributed to the excessive increase of costs experienced by the non-integrated network. The difference between the integrated and non-integrated trends are caused by the differences in provider contracting, fee schedules, and utilization and review management.
- .--.. ---PlmYear Pn15 PYM 24 munth average
Twelve month trend
Network . . -. .. .
I
I
AFMC~ 337.16 40368 36591
Beaehstnetl 20999 268aZS
2B28
H M A ~schallet hdersonl United HerdWarel 238.95 2[]0% 22433 1 287.73 a5599 231.52 262.8r5 2Zs.SLI 22B.01
G r a d Total
226 OP -- -
I
a5427 240.22
Plan Year PYOS - PYU6
AFMC 1 19.73%
Beach stnet1 2794%
HMA] Schalla ~ n d m o n lUnitsd~ealth~arel 20.42% 273846 321%1
GrandTotal 12.46%
Medical TzendElementsPYD5 PY06
-
..""". ..
Elwents dTrend
Utilization
I
Cost Annual trend
Hriuingtonl UnitedHealthCarel Tag% -8.58% 1 14.22% 12.89% 22.31% 3.21%1
1
Tdal -lm% 1~.70% 12.46%
Analysis of the Actuarial Soundness of the Health Insurance Benefit for PY06 and the Current PY07 (Continued)
The pharmacy retail and mail-order claim analysis was preformed using the incurred dates October 1,2004, through September 30, 2006, with four months of run-out, see the summary below. The plan had a 10.1% trend in cost and utilization for the experience period. The 10.1% trend is a product of an 8.46% increase in cost of drugs and a 1.51% increase in the utilization in drugs. The plan's trend is in line with industry trend of about 12.0%.
h g TnndPM5 - PW6 Permember per month.
PlanY a er
PMS PYD6
24 month average Twelve month trend
I I
N~tivnrk - .-- - ---
AFMC 1
122.49 13753 12899
~each~tnetl 96.56 101.50 99.03
HMA~ Schaller~ndersonlUnited~ealthCsnl
33.48 3841 36.14
41.43
4539 43.41
1 59.99 1 5734 1
54%
GrandTotd 49.73
54.75
52.25
Network
Plan YEW PYOI - PYD6 AFMCl 12346 Bsach~treetl 5.146
HMA Schaller ~ndersonlUnited Healthcan 16.2% 9.6% 1034bl
1
1
GrandTDtal 10.1%
A number of risk factors exist affecting the volatility in the projections and may affect the HITF and the Plan. Some of the risk factors that have been specifically identified include the following:
Health care trends are comprised of several factors, including changes in the cost of services (prices inflation), changes in the number of services used (utilization inflation), changes in the severity mix of services used (severity/complexity inflation) and random fluctuation. Historical trends are a reasonable indicator though future increases may be different. The fact that historical information is limited increases the risk factor as it exists for the trend assumption. Variations in catastrophic claims or significant events, such as a severe flu season, can affect medical expenses in ways that cannot be completely predicted in advance, even with the existence of stop loss insurance. Changes in enrollment, either fi-omplan to plan or in total, will create uncertainty relative to both claim costs and revenue.
Analysis of the Actuarial Soundness of the Health Insurance Benefit for PY06 and the Current PY07 (Continued)
Revenue projections are based on rate increase assumptions disclosed in our report. Actual revenue deposited in the HITF varies significantly fiom month to month and may be affected by other events as part of the issues related to the sweeping of funds and other decisions made by the Legislature and others. The projections provided in this report represent the most current information available. Future projections may differ fi-om these results for many reasons, including but not limited to enrollment change, changes in revenue and random or unexpected claim fluctuations. All estimates, based upon the information available at a point in time, are subject to unforeseen and random events. Therefore, any projection must be interpreted as having a likely range of variability fi-om the estimate. The data were accepted without audit and we have relied upon the health plan vendors' reports. For the plan year 2006 and current plan year 2007, the Plan used generally used accepted actuarial principles and practices and is considered to be actuarially sound. This actuarial memorandum has been based on the actuarial methods, considerations, and analyses promulgated from time-to-time through the Actuarial Standards of the Actuarial Standards Board.

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JANET NAPOLITANO
Governor
WILLIAM BELL
Director
ARIZONA DEPARTMENT OF ADMINISTRATION
OFFICE OF THE DIRECTOR
100 North Fifteenth Avenue, Suite 401 Phoenix, Arizona 85007 (602) 542-1500
JUN 2 9 2007
June 27,2007 The Honorable Janet Napolitano Governor of the State of Arizona State Capitol 1700 W. Washington Phoenix, AZ 85007 The Honorable James P. Weiers Speaker of the House Arizona House of Representatives 1700 W. Washington Phoenix, AZ 85007 The Honorable Robert Burns Chairman, Senate Appropriations Committee Arizona State Senate 1700 W. Washington Phoenix, AZ 85007
OFFICE OF THE PRESIDENT
The Honorable Tim Bee President of the Senate Arizona State Senate 1700 W. Washington Phoenix, AZ 85007 The Honorable Russell K. Pearce Chairman, House Appropriations Committee Arizona House of Representatives 1700 W. Washington Phoenix, AZ 85007 Richard Stavneak, Director Joint Legislative Budget Committee 1716 W. Adams Phoenix, AZ 85007
Dear Governor Napolitano, President Bee, Speaker Weiers, Representative Pearce, Senator Burns and Mr. Stavneak: Please find enclosed the Annual Report on the Financial Status of the Special Employee Health Insurance Trust Fund, as required by A.R.S. 38-654 (H). If you have any questions concerning this report, please contact Paul Shannon, Budget Manager at 542-1510. Sincerely,
Charlotte Hosseini Deputy Director c: James Apperson, OSPB
Actuarial Memorandum Employee Health Insurance Trust Fund Pursuant to ARS. 538-654 March 1,2007
Contents Executive Summary Actuarial Methodology Actuarial Assumptions Data Enrollment HITF' and IBNR Reserve Preliminary Premium Rate Increase Analysis of the HITF for October 1.2004. through September 30. 2005 Analysis of the HITF for October 1. 2005. through September 30. 2006 Analysis of the HITF for the current plan year October 1.2006. through September 30. 2007 Analysis of the HITF for the projected plan year October 1.2007. through September 30. 2008 Analysis of the Actuarial Soundness of the Health Insurance Benefit for PY06 and the Current PY07
................................................................................................................................................................................... 2 .............................................................................................................................................................................. 3 .............................................................................................................................................................................. 4 ............................................................................................................................................................................................................. 5 ............................................................................................................................................................................................. 6 ........................................................................................................................................................................... 7 ....................................................................................................................................................... 9 ...........................................................................................10 11 ........................................................................................... ..................................................... 12 ..................................................13 ........................................14
Executive Summary The purpose of this actuarial memorandum is to demonstrate the development and financial status of Employee Health Insurance Trust Fund (HITF) pursuant to A.R.S. $38-654 (H), which reads: The department of administration shall submit an annual report on the financial status of the special employee insurance trust fund to the governor, the president of the senate, the speaker of the house of representatives, the chairpersons of the house and senate of appropriations committees and the joint legislative budget committee staff by March lSt each year. The report shall include: The actuarial assumptions and a description of the methodology used to set premiums and reserve balance targets for the health insurance benefit program for the current plan year, An analysis of the actuarial soundness of the health insurance benefit program for the previous plan year, An analysis of the actuarial soundness of the health insurance benefit program for the current plan year, based on both year-to-date experience and total expected experience, and A preliminary estimate of the premiums and balance targets for the next plan year, including the actuarial assumptions and a description of the methodology used. Highlights of the actuarial memorandum are as the following: The enrollment growth of the plan is fairly flat at 0.6%, = The projected HITF balance at FYE 07 is $71.1 million, = The preliminary premium composite rate increase for plan year 2008 is 7.3%, and = The plan appears to be actuarially sound for the past plan year 2006 and the current plan year 2007.
Actuarial Methodology The Arizona Department of Administration (ADOA) uses three elements to manage the Health Insurance Trust Fund (HITF), to set premiums, and to estimate the claims incurred but not reported (IBNR) reserves: Experience rating, Risk adjustment factors, and Information systems. ADOA uses what is known as a prospective experience rating method in which premium rates are set in advance based upon a plan's experience and projected future experience. Prospective experience rating takes into account the pooled historical and projected costs of the active and retired members of the health insurance benefit plans managed by the ADOA (collectively, the Plan). The following factors are taken into account when projecting historical cost and utilization to future time periods: Inflation of medical costs, Claims incurred but not reported, Provider contract renewal dates, Delivery system changes, Enrollment and population changes, and Changes in medical technology and other factors that affect medical costs. Risk adjustment factors incorporate the health characteristics of the Plan's patients, as well as their propensity to use clinical services. The following factors may be used: Age and gender demographics descriptors, Clinical data fiom claimslencounters, and Survey data and health risk assessments (HRAs), when available. Information systems support premium rate and fund development activities: a variety of data enable the monitoring and analysis of the Plan's utilization, cost and the overall financial performance. Various vendor reports and detailed medical and pharmaceutical data are available.
3
Actuarial Assumptions
The following assumptions were used to develop the HITF projections: Projections are based on operating cash flows, Annualized trends include utilization and cost components for Plan Year 2008, Annualized medical trend of 12.0%, Annualized pharmaceutical trend of 12.0%, Annualized dental trend of 7.5%, Plan administration fees to increase by 6.0%, Stop-loss reinsurance premiums to increase by 15.0%, $500k quarterly Medicare Part D subsidy reimbursement trended at 12.0%, $1 million quarterly in prescription drug rebates refunded back to the plan, Annualized medical trend in enrollment growth of 0.6%, and Annualized dental trend in enrollment growth of 0.6%. More of the larger agencies will adopt a pay-as-you-go method as opposed to participating in the General Fund Sweep.
Data
The following data were used to develop the HITF projections: Actual monthly paid claim funding requests, Actual monthly paid medical, pharmaceutical and dental data reported by the administrators of the integrated and nonintegrated networks, Current medical plan enrollment, rates, and employee and retiree contributions fiom July 1,2004, through December 3 1, 2006, Administrative fees for each plan fiom July 1,2004, through December 3 1,2006, Dental enrollment, premiums and claims/encounters fiom July 1,2004, through December 3 1,2006, Stop-loss reinsurance premiums and recoveries from July 1,2004, through December 3 1,2006, The HITF ending balance of approximately $94.7 million as of December 3 1,2006, and Costs associated with pass through of Blue Cross Blue Shield's plan for NAU. A schedule of paid and projected medical and dental claims, appropriations and receipts is included in the analysis sections of this memorandum.
Enrollment The following enrollment forecasts were used to develop the HITF projections. The medical enrollment was trended at 0.6% growth annually for PYE 07 and PYE 08. The dental enrollment was trended at 0.6% growth annually for PYE 07 and PYE 08.
Efirallmrrrt Projr caian Actual PYE 114 Actual PIT US Actual PIEE116 Projected PIEEn7 Prajasted PIT ng
Retirees University Total Medical Dental
9,0123 14,996 5593 59,lIJl
9,5183 18,318 83,412 59,977
5l,Q184 18,6501 64471 6lZ686
9,713 14750 64,8164 62,056
9,7221 16,851 85,243
62,429
'5tak Employeas including Political Suhdivisinns md NAU.
PYE = Plan Year End
HITF and IBNR Reserve
The HITF reserve was set up to cover potential fluctuations due to experience not developing as projected and to reimburse ADOA's administrators, vendors and funded plans. The HITF reserve will also cover potential, additional administrative expenses and the Plan's possible losses in subsequent periods. In addition, HITF reserve fundsare available to offset a portion of the liability associated with the IBNR claims run out for the self-funded medical plans. The HITF balance changes as general fund receipts are added and expenses are paid. It is important to note the HITF balance can fluctuate greatly from month-to-month due to revenue fluctuations as well as the effects of the General Fund Sweep. There is an assumption that more agencies will adopt a pay-as-you-go method rather than participating in the General Fund Sweep. As the larger agencies adopt the pay-as-you-go funding, we can expect the HITF balance to be more consistent fiom one month to the next. The PYE 08 HITF balance of $103 million is very sensitive to both claim projections and projections of receipts. However, the change of the HITF balance has been only about 3.0% of the total expenditures for the last three plan years. The IBNR reserves are estimated, based on the monthly pattern of incurred and paid claims, and measure of the time and amount between the month a claim is incurred and the month the claim was paid. The calculation of the IBNR reserve is based upon the claim lag pattern experience through December 31,2006, trended fonvard. The amount to hold for the IBNR reserve was calculated by taking the claim distribution of the claim probabilities. Once the claims distribution was set up the mean and the standard deviations were calculated for the claim distribution. The projected HITF balance can be compared to projected IBNR Reserves.
HITF and IBNR Reserve (Continued)
Numbers iae in millions
AC~!A FYE 05
Actwl
PYE 05
Actual FYE 06
Actual PYE 06
projected FYE 07
Projected PYE M
ProjectedS FYE 08
projected PYE 08
Projected Receipts Projected Expensel
$506.8 $485.0 $45.0
$544.8 $506.2 $46.9
$553.2 $555.9 $47.1
$550.6 $558.1 $46.5
$635.7 $611.6 $56.6
$620.2 $611.6 $56.6
$647.7
$639.3 $59.1
$658.4 $647.1 $59.9
IBNR End& Reserve
Loss Ratio3
FYE = Fiscal Year End
PYE = Plan Year End '~rojectionsare based on operatiug cash flows
aIncluding lCdminfees, Stop-Loss, and DentaL
3 ~ ~ e l mmah Rolling Loss Ratio ve
%du+ %du+
a composite rate increase of 13.3%. a composite rate increase of7.3%.
Preliminary Premium Rate Increase
The following is the build up for the Preliminary 2008 Plan Year rate increase. The composite projected rate increase was developed by pooling the experience and expenses of employees, retirees, and dependents. The projections include all medical, drug, and dental costs. While the projections reflect a combined rate, the actual rate increases of employees and retirees are likely to differ. The effective rate increase may depend on a group's pro-rata share of the claim cost and the future cross-subsidy between the rating tiers and enrollment status. Each medical product has a 2.0% margin built into the premiums; health premiums are set for a 98.0% medical loss ratio. Setting the margin at 2.0% (98.0% loss ratio) would suggest a 7.3% composite rate increase.
Projected Composite Premium Increase Humhers in 1,DDDs Annualized Trend Medical & Drug Claims Arlmifiistration Fees Stop-Loss premium O h r AEtnifiErpenses te Dental Expenses Totat casts TotalRcceipts PY 06 (iiludkg Pslt D refund) Twelve month loss ratio 21 mrmths Trend Factor Prajected PYE 08
Proposed PY 08 Premium Increase
Note that the proposed 7.3% composite increase is less than the annualized cost trend of 11.4% over the 21 months. The difference between the projected cost and the proposed rate increase is largely due to slightly better than expected claims experience, as shown by the 97.2% loss ratio for CYE 06.
Analysis of the EUTF for October 1,2004, through September 30,2005
Receipts and costs include: the self-funded plan's claims/expenses, URUM administration fees, stop-loss premiums, Blue Cross and Blue Shield premiums, and Pacificare premiums. Claims and expenses are based on actual cash flows. Note the HITF balance can fluctuate greatly from month-to-month due to revenue/expense fluctuations as well as the effects of the General Fund Sweep.
Actual
Actual
Actual
Actual
Actual
Mar45
SX2.7332
Awns
$77.0270 49.7Al
I
d
Total
544.SZl.l
4.538
-8 33,1248
Medical& Drug Claims (cashbares) AdmWtfetionFees Stop-Losspremium Othu Adminkrpsnsss
4,06 549
1m5 2320
4,03 276
1.6D43 232.8
P) a
47.1XS5
3,056.4
w . 8
m3
447846
42.1981 im.4 ZP.8 1965 44.215.4
v.6
444.rn1.6 17.X86.6 2,453.7
5243.4
-2
35342.4
-1
49,7681
33,124.0
544822.1
Analysis of the HITF for October 1,2005, through September 30,2006
Receipts and costs include: the self-funded plan's claimslexpenses, URUM administration fees, stop-loss premiums, Blue Cross and Blue Shield premiums, and Pacificare premiums. Claims and expenses are based on actual cash flows. Note the HITF balance can fluctuate greatly from month-to-month due to revenuelexpense fluctuations as well as the effects of the General Fund Sweep.
Actud
A! o c. l u
OcUl5 Ex7334.0 41m.1
Nmr-05 $42513 40.0145
Actnu! DccaS $ZtS>26.1 35,6259
Actual JmM
Actual
Actual
176gl56 52,1912
Feb-06 S8976.P 35947.1
Mar46 $747776 4350.4
Actual Apr-06
$68931.4 5474.1
Actual May-M S844133 35,893Ll
Actual Jun-06
Actud Jul.06
Actual Aug-M
Actual
ScpW
$66.4660 9.418.4
Total
11741865 31,1436
$47.021.4 35.4243
$42.0123 79,5992
5-3
Analysis of the HITF for the current plan year October 1,2006, through September 30,2007
Receipts and costs include: the self-funded plan's claimslexpenses, URUM administration fees, stop-loss premiums, Blue Cross and Blue Shield premiums, and Pacificare premiums. Claims and expenses are based on actual and budged cash flows. Note the HITF balance can fluctuate greatly from month-to-month due to revenuelexpense fluctuations as well as the effects of the General Fund Sweep.
BeginningBalancr EstimatcdMrmthlyMedicaUDentulReceipts Msdicsn PmtD SubsidyPaymmt Medical& Drug C a m (cashbases) lir AdminirCrationFees StDpLorspremium 0 t h AdminExpcnses
Actual Oct-06 $79813.1
Actwl Nov-Cki $87501.4
Actual Dcc-06 B8.1135
Actual 1-m $93241.1
Pmjectud ~eb.07 W.8959
Projected
Mr0 a-7 57 2 8W
Pmjsctad Apfi07 18730311
Pmjechd May47 1101,6593
Pzcjectcd
Judl7
Pmjachd
Jd.07 $71.1155
E Z73 X 69
Pmjected Augm $79P13
Pmjsctod
Sepm
l2.2619
Ttl oa
T w e k monthloss ratio
Analysis of the HITF' for the projected plan year October 1,2007, through September 30,2008
Receipts and costs include: the self-funded plan's clairns/expenses, URUM administration fees, stop-loss premiums, Blue Cross and Blue Shield premiums, and Pacificare premiums. Claims and expenses are based on budged cash flows. Note the HITF balance can fluctuate greatly from month-to-month due to revenuelexpense fluctuations as well as the effects of the General Fund Sweep. There is an assumption that more agencies will adopt a pay-as-you method rather than to participating in the General Fund Sweep.
PY200X cashF ~ ~ K P I ~ ~ c ~ ~ Numbersm lp00s
BegmnmgBalaaee Estnnuled Monthly MadtcallDmtdRecuptr Modtcan PadD Subndy Payment Medical& Drug Clahns (cash bares) Ad&istratinnFeer StDpLDss prembna
Pmjscted
Oct-07
Pmjscted NOY-UI
Projected Dee-07
P~ojccted
Jnn-Og
Projected FebOs
$94,2436
Pqected
Mu-(lg
$%8,W2 5,,97 6@48
$83,7539 53,1423
$87.9707 f2.4438 536 0
$95,7191
%@8J
516442
Ol.6257 54,6367
552.0
Pcqscted Apr-08 W4 50 .6.
Prqected May-MI
Projeclnd Ju&Lx
545549
$3984 9E395 5231*3
5849855
2&?47
Projacted JuU18 $79,531
Projected Aw-08
Projected
Snp.08
TOM
516414
$937 8.76 62.m4
-4
56813
55,2351 58511
656,1545 221 ,43
Mhu AdminErpenrcs
Twehe monthloasratio
Analysis of the Actuarial Soundness of the Health Insurance Benefit for PY06 and the Current PY07
The analysis of the actuarial soundness of the health insurance benefit looked at the following topics: Experience rate setting, Trend (utilization and cost) of the Plan's claims/encounters by network, Administrative expenses, and = Risk adjustment factors. The past and current rates were developed using generally accepted actuarial principles and practices and are considered to be actuarially sound. The rates are developed by pooling the experience and expenses of employees, retirees, and dependents. The projections include all medical, drug, and dentalcosts. The actuary for the plan uses a forecast model to determine cost trends and expenses. Calculations within the model use a twelve month moving average of incurred medical and pharmaceutical claims and encounters. The model also includes IBNR, administrative expenses, and other third parties costs. The model includes an estimate of incurred and paid claims run-out. To insure the adequacy of the premiums for the Plan's benefits the actuary uses several industry standard tools and sources. The Milliman Health Cost Guidelines are used to the model and price the Plan's benefits and expenses. Also, the financial status of the Plan is compared to external research and statistics. Some of the studies used for comparison include the Centers of Medicare and Medicaid Services and the Kaiser family foundation.
Analysis of the Actuarial Soundness of the Health Insurance Benefit for PY06 and the Current PY07 (Continued)
Medical claims and encounters analysis was preformed with incurred dates October 1,2004, through September 30,2006, with four months of run-out, see summary below. The Plan had a 12.5% trend in cost and utilization for the experience period. The 12.5% trend is a function of the 3.2% increase in trend for the integrated network and of the 22.3% increase in the trend for the nonintegrated networks. The Plan's trend is higher than the industry trend of about 8.0%. The fact that the Plan's trend is higher than the industry's can be attributed to the excessive increase of costs experienced by the non-integrated network. The difference between the integrated and non-integrated trends are caused by the differences in provider contracting, fee schedules, and utilization and review management.
- .--.. ---PlmYear Pn15 PYM 24 munth average
Twelve month trend
Network . . -. .. .
I
I
AFMC~ 337.16 40368 36591
Beaehstnetl 20999 268aZS
2B28
H M A ~schallet hdersonl United HerdWarel 238.95 2[]0% 22433 1 287.73 a5599 231.52 262.8r5 2Zs.SLI 22B.01
G r a d Total
226 OP -- -
I
a5427 240.22
Plan Year PYOS - PYU6
AFMC 1 19.73%
Beach stnet1 2794%
HMA] Schalla ~ n d m o n lUnitsd~ealth~arel 20.42% 273846 321%1
GrandTotal 12.46%
Medical TzendElementsPYD5 PY06
-
..""". ..
Elwents dTrend
Utilization
I
Cost Annual trend
Hriuingtonl UnitedHealthCarel Tag% -8.58% 1 14.22% 12.89% 22.31% 3.21%1
1
Tdal -lm% 1~.70% 12.46%
Analysis of the Actuarial Soundness of the Health Insurance Benefit for PY06 and the Current PY07 (Continued)
The pharmacy retail and mail-order claim analysis was preformed using the incurred dates October 1,2004, through September 30, 2006, with four months of run-out, see the summary below. The plan had a 10.1% trend in cost and utilization for the experience period. The 10.1% trend is a product of an 8.46% increase in cost of drugs and a 1.51% increase in the utilization in drugs. The plan's trend is in line with industry trend of about 12.0%.
h g TnndPM5 - PW6 Permember per month.
PlanY a er
PMS PYD6
24 month average Twelve month trend
I I
N~tivnrk - .-- - ---
AFMC 1
122.49 13753 12899
~each~tnetl 96.56 101.50 99.03
HMA~ Schaller~ndersonlUnited~ealthCsnl
33.48 3841 36.14
41.43
4539 43.41
1 59.99 1 5734 1
54%
GrandTotd 49.73
54.75
52.25
Network
Plan YEW PYOI - PYD6 AFMCl 12346 Bsach~treetl 5.146
HMA Schaller ~ndersonlUnited Healthcan 16.2% 9.6% 1034bl
1
1
GrandTDtal 10.1%
A number of risk factors exist affecting the volatility in the projections and may affect the HITF and the Plan. Some of the risk factors that have been specifically identified include the following:
Health care trends are comprised of several factors, including changes in the cost of services (prices inflation), changes in the number of services used (utilization inflation), changes in the severity mix of services used (severity/complexity inflation) and random fluctuation. Historical trends are a reasonable indicator though future increases may be different. The fact that historical information is limited increases the risk factor as it exists for the trend assumption. Variations in catastrophic claims or significant events, such as a severe flu season, can affect medical expenses in ways that cannot be completely predicted in advance, even with the existence of stop loss insurance. Changes in enrollment, either fi-omplan to plan or in total, will create uncertainty relative to both claim costs and revenue.
Analysis of the Actuarial Soundness of the Health Insurance Benefit for PY06 and the Current PY07 (Continued)
Revenue projections are based on rate increase assumptions disclosed in our report. Actual revenue deposited in the HITF varies significantly fiom month to month and may be affected by other events as part of the issues related to the sweeping of funds and other decisions made by the Legislature and others. The projections provided in this report represent the most current information available. Future projections may differ fi-om these results for many reasons, including but not limited to enrollment change, changes in revenue and random or unexpected claim fluctuations. All estimates, based upon the information available at a point in time, are subject to unforeseen and random events. Therefore, any projection must be interpreted as having a likely range of variability fi-om the estimate. The data were accepted without audit and we have relied upon the health plan vendors' reports. For the plan year 2006 and current plan year 2007, the Plan used generally used accepted actuarial principles and practices and is considered to be actuarially sound. This actuarial memorandum has been based on the actuarial methods, considerations, and analyses promulgated from time-to-time through the Actuarial Standards of the Actuarial Standards Board.